STRICTLY CONFIDENTIAL 1 DM/er INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D. C. Tuesday, December 21, 1976 The meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10 a.m., in the Board Room, 1818 H Street, N.W., Mr. Robert S. McNamara, President, presiding as chairman. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 _,....,~ r-ar l'CCC STRICTLY CONFIDENTIAL 2 CONTENTS Agenda Item Page Proposed Loan - Chile (Livestock, Fruits, Vineyards and Agro-Industry Credit Project) 5 Proposed Loan - Chile (Sixth Power Project) 5 HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 5 This brings us, then, to agenda items No. 1 and 2 on our regular agenda dealing with loans carried over from the previous week, two loans to Chile, one in the amount of $25 million equivalent for a livestock and agricultural progect and the other in the amount of $35 million equivalent for a power project. I will ask Mr. Levy to present both of these to you, and then we will open them for your discussion. Mr. Levy. MR. LEVY: Mr. Chairman, Members of the Board: It would be difficult to exaggerate the magnitude of the shocks and strains that have been suffered by the Chilean economy during the past six years. In terms of economic growth and development, a full decade has in effect been lost, and only HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 .,~IV\, r:•c cc.c.c. STRICTLY CONFIDENTIAL 6 by 1978 or 1979 will the per capita income levels of 1970 be regained. Between 1970 and 1973 the economic role of the Gove n- rnent was dramatically expanded. A large share of the manufacturing sector, the entire financial sector, the major copper mines, and one-third of cultivable land were taken under Government control. Public sector expenditures grew rapidly as a proportion of GDP, while charges for public services were held fif,ed or adjusted infrequently and the real value of tax collections was eroded by accelerating inflation. Public sector revenues declined relative to GDP, and the resulting massive deficits were financed largely through monetary expansion. The money supply grew 28-fold during this period. Meanwhile, extensive price controls resulted in sup~ shortages throughout the economy, and economic and financial transactions increasingly shifted to the black market. With the black market included, consumer prices rose some 35-40 times the 1969 level. The Government's effort to maintain a fixed exchange rate choked off non-copper exports, while imports expanded rapidly. As a consequence, Chile's net international reserves, which had been at an all-time high in 1969, were by 1972 negative, and service payments on the HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ·--• r•,,. r~t:t: STRICTLY CONFIDENTIAL 7 external debt were suspended. The expansionary and redistributive policies of the Allende Government resulted in a sharp increase of output and in the real incomes of Chile's workers in 1971, but in the accelerating inflation this trend was reversed by mid-1972 Real wages and production continued to fall through 1973. The Government that took power in September 1973 reversed the policy directions of its predecessor. In an effort to reestablish bal~ce of payments equilibrium, the escudo was sharply devalued and a crawling-peg introduced. At the same time, most prices were freed in the effort to correct accumulated supply-demand imbalances, taxes and public service charges were raised, the process of returning most expropriated and intervened assets -- other than land -- to the private sector was begun, and a settlement was achieved of outstanding compensation claims of expropriated foreign investors. The Government announced its intention to consolidate the land reform,and the process of titling land recipients was begun. The Government also moved to liberalize foreign trade, reducing tariff and nontariff barriers to imports, in an effort to reverse several decades of protectioni 1 and an import-substitution growth strategy. Output began to recover in 1974, and the inflation HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ·- -.. r•r /!CCC STRICTLY CONFIDENTIAL 8 .appeared to be winding down,_ albeit slowly. Agricultural e>qtput rebounded particularly strongly, and non-copper exports 8'0re than doubled. However, because of its heavy dependence m:t imported oil and on copper exports, Chile was among the countries most hurt by the increased price of petroleum and ' t:be subsequent slowdown of the international economy. High cope: ,prices in early 1974 helped to reduce the balance of payments ~ssure and allowed the Government some elbow room in its efforts to reduce the public sector deficit while trying to restore and maintain real income levels. The price and volume •t copper exports declined rapidly during the second semester cf 1974, however, and by the end of the first quarter of 1975 it was clear that Chile faced an unfinanceable balance of payments deficit, projected to exceed $800 million. Despite the continued growth of non-copper exports, which were respond- ing to the flexible exchange rate policy, debt service payments ~ose from 11 percent of exports in 1974 to 29 percent in 1975. Almost $200 million in IMF support helped to ease the Adjustment somewhat but with no cushion of reserves and limited access to external capital, Chile had no alternative but to cut _ back imports sharply. At the same time, inflation had begun to reaccelerate despite a greatly reduced public sector deficit and a contracti HOOVER REPORTING Cl)4 JIit. 320 Massachusetts AverM,.,U. Washington, D.C. 20002 . 1tllVl\ C:.A.C: e;,::_~~ STRICTLY CONFIDENTIAL 9 real money supply. There was growing concern that the situat on might get out of control. In re~ponse to the crisis, and as the only realisti alternative to defaulting on the external debt, the Governmen· introduced a severe stabilization program in April 1975. The Central Government's spending on goods and services was cut by almost one-third in real terms, and at the same time tax collections outside the copper sector were further increased. As a result of these actions and similar economy measures ' in the public enterprises, the public sector deficit was eliminated. The real money supply was further tightened, and interest rates were freed. As a consequence of these measures imports were reduced from $2.4 billion in 1974 to under $2 billion in 1975. In spite of a 46 percent decline of copper revenue, the overall balance of payments deficit in 1975 was held to $275 million, almost all of which occurred during the first half of the year. The rate of increase of the conswner price index, which had reached 428 percent in the 12 months ending in May 1975, has been falling steadily since then, totaling 179 percent in the 12-month period ending November 30, 1976. The forced reduction of imports could not have been achieved without serious impact on domestic production. The HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 '"RI\\ CAC. CC.C.C. STRICTLY CONFIDENTIAL 10 difficult adjustment which the Chilean economy had to make necessarily came at great sacrifice to the Chilean people. Th GDP declined by more than 13 ·percent in real terms in 1975, and when the extraordinary deterioration in Chile's terms of trade is taken into account, the per capita national income fell by over 20 percent. Virtually all Chileans, particularly in the urban areas, have shared in some degree the burden of the sacrifice. Total wages and salaries declined an estimated 12 percent in real terms, non-wage incomes in the aggregate falling even more. As previously mentioned, real tax collec- tions, particularly those on property, went up in spite of the loss of income. The greatest suffering has, of course, occurred among the urban unemployed, despite the introduction of an emergency public employment program and increased unemployment insurance benefits. During 1976, the country's economic and financial situation has improved significantly. The stronger world copper market, a substantial increase in the rate of capital inflow from banks and from suppliers, and continued austerity have dramatically improved the balance of payments, and we now estimate that net reserves will have tisen between $350 and $400 million during 1976. At the same time, Chile is meet J its debt service obligations, totaling more than $800 million, HOOVER REPORTING CO~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ·---~ ... ,. ,.,.,.t'! STRICTLY CONFIDENTIAL 11 without rescheduling for the first time in several years. In light of the improving balance of payments, the ,Government began to move cautiously toward restimulation of · i:t)e economy in mid-1976. The GDP will have risen around 4 percent by year end, and the unemployment rate has begun to 4ecline from an average of 19 percent in greater Santiago . during the second quarter of 1976 to an estimated 13 percent ln the last quarter. The recovery is far from complete, · ,,owever, and great hardship continues to exist, particularly «mong the urban unemployed. Taxes will be reduced next year, and the 1977 budget cal~s for increased Government expenditure for housing and public works. With the rising trend anticipated for the copper pri e and the continued expansion of non-copper exports, it will be possible for Chile to achieve a high rate of growth of output ~ and employment through the rest of the decade along with the full servicing of the external debt, a steady reduction of the debt service ratio, and a gradual replenishment of internation 1 reserves. In swnmary, the worst of the crisis, brought on by the collapse of copper prices in 1975, is past, and the balanc of payments should represent a less serious constraint on economic recovery and growth in the medium term. At the same HOOVER REPORTING co~ 320 Massachusetts Aven~ Washington, D.C. 20002 ' STRICTLY CONFIDENTIAL 12 time the reinstitution of a possible exchange rate, the ration lj zation and liberaiization of the tariff structure, reform of the tax system, improved management of the public sector budget, and measures designed to improve the operation of the domestic capital market make it possible for Chile to diversify its exports and gradually reduce its vulnerability to fluctuations in the world market for copper, while significantly improving on its historical growth performance. Given Chile's improved prospects, we consider the country creditworthy for Bank lending. The Bank has been a marginal lender to Chile in rece t years. Since the beginning of 1974, Bank loan conunitments have totaled $58 million, as compared with $226 million from the IDB, approximately $230 million in bilateral assistance, and $322 million in net drawings on the IMF. The two projects before you will contribute both to Chile's economic recovery and to sustained growth in longer run. Both are consistent with the overall economic strategy of the Government, and support key elements in that strategy. The proposed rehabilitation of the electric power sector, required by years of underinvestment, is essential to support the power needs of the industrial sector as it resumes normal levels of operation. It thus is a vital ingredient in HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 13 policies designed to expand productive employment. In additio, it is necessary also to the future expansion of the system, particularly into the rural areas. The agricultural credit loan will provide support for the development of some of Chiles most promising areas for the expansion and diversification of exports. We would also like to inform you of a development tn t occurred yesterday. The President of Chile announced some changes in the Cabinet which included some shifts in the Economic Team. In particular, Mr. Sergio de Castro, until now Minister of Economy, succeeds Mr. Jorge Cauas as Minister of Finance. Mr. Pablo Baraona, until now president of the Centra Bank, succeeds Mr. de Castro,and Mr. Alvaro Bardon, until now vice president of the Central Bank, succeeds Mr. Baraona. Th announcement included a statement that there would be no chang s in economic policy. Thank you. MR. McNAMARA: Thank you. Four directors have asked to speak. I will call on them in order and then recognize others who may wish to participate as well. First, Mr. Magnussen. MR. MAGNUSSEN: You, Mr. Chairman, have ~ag ~e full HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 _a...,.._ rar ~t:.C..C. STRICTLY CONFIDENTIAL 14 support of the Nordic countries when you have .emphasized the importance of social justice and income equality for the development process. If full attention is not paid to these aspects, I believe it will be difficult to strengthen or indeed even to maintain general support for development aid in the countries that I represent. In our judgment, the policies so far pursued by the present Government of Chile do not to any satisfactory extent further a high degree of equality and social justice to the Chilean people. With decreasing economic activity and high inflation and declining real wages, the inevitable result is unemployment, malnutrition and widespread social disruption. The major share of the burden has been borne by the unemployed and the poorest people. We regard it as necessary to base the decisions on these matters on ah overall judgment of the economic, social, and development policies of the Chilean Government. We fail to see that it is meaningful to separate some economic indicators and make a judgment on the basis of these without due regard for the total economic, social environment. Again, we are sorry to note that the staff appraisal of the Chilean economy appears to put undue emphasis on what may be regarded as the more positive aspects of economic HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 STRICTLY CONFIDENTIAL . 15 development in Chile and that the appraisal in its point of focus differs from . other information that has recently comet our attention. In our judgment, we have not received information that warrants new conclusions since the Board last discussed a loan to Chile. Out of consideration for maintaining and strengthe ni g the support for this organization and its role in the ;f development process, we would have regarded.Jrit as a wise decision if the management had postponed the presentation of any further projects in Chile until improvements in that coun economic and social policies were clearly discernible. Under the circumstances, I am left with no other choice than showing my authorities' strong opposition to granting the two loans by in each case requesting a formal vote and by casting my vote against. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Magnussen. We will then have a formal vote upon conclusion of the discussion. Mr. Franco. MR. FRANCO: Thank you, Mr. Chairman. I will just note very briefly that it is quite clear HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ,.,M\CH:1:1:1:1: STRICTLY CONFIDENTIAL 16 that the Chilean economy has shown very positive signs of a gradual recovery during this year. Despite copper prices being still at a comparatively low level, the balance of payments position has improved as a result of, among other things, the introduction of measures affecting exahange and ~ interest rates and the present Government's austerity actions related to the public sector. On the whole, one can very well perceive that there is a more disciplined economic management. These measures are beginning to bear fruit, and it is worth noting in particular that they have enabled the Government to attract foreign capital from both private and public sources. This reflects confidence by foreign lenders and investors in Chile' future and its creditworthiness. I have still to comment on the project itself I am talking about the agricultural project -- or on the one for power other than to observe that in both cases a relativel large proportion of the financing will be provided from local sources, which is not wealthy in the present circumstances, and that the two projects will assist very definitely in the process of economic recovery. In short, Mr. Chairman, I support the two proposals. I only have one question on detail, if I may digress HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ""'"" c ,c c.cc.i.: STRICTLY CONFIDENTIAL 17 on something very trivial~ I am confused about it, on which I would like to have some clarification. I am not sure I unde - stand what is the situation in unemployment. In Annex I, ther is a figure of 4 percent, and in paragraph 7 of Annex IV, we talk. about 18 percent. I mean, the presentation that we heard there was mention of a reduction from 19 percent to 13 percent. I wonder if I could get some clarification as to thi. MR. McNAMARA: Mr. Levy, could you explain the difference? MR. LEVY: I apologize for that discrepancy. The problem is there are two different surveys, and the one that I have uaed in the Annex IV, which is done by the University f Chile, showed the numbers indicated for March and for Septembe. It is a survey that is carried out quarterly. In my statement we had more recent data from the survey done by the National Institute for Statistics, and in order to give a more recent number, we used that survey and compared it with the number that that survey had shown in Marc which had been 19 percent. That is the reason for the 1 perce difference. MR. McNAMARA: He was really asking about the 4 percent shown in Annex I. It's an old figure and it should no be there. It simply is absolutely a failure to keep that HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 STRICTLY CONFIDENTIAL 18 annex up to date, and I am glad you called it to our attention Mr. Franco, because we just must insist that that annex be consistent with the text, and in this particular case it is not. It is out of date. MR. FRANCO: From time to time there have been some discrepancies. MR. McNAMARA: You are absolutely right. I usually check these myself, and I missed that one. MR. FRANCO: Thank you. MR. McNAMARA: Mr. El-Naggar. MR. EL-NAGGAR: Thank you, Mr. Chairman. I don't think there is much difference, at least I hope there is not much difference, with respect to the economic soundness of projects which are presented to the Board today on Chile. If I limit myself to start with to the pgricultural project, I would say that that project has as much development impact as one would expect from a project of that nature. From the point of view of income creation, the projec is supposed to have an economic rate of return which could be as high as 27 percent, and sensitivity analysis shows that under adverse assumptions, the rate of return would still be as high as 17 percent. So from the point of view of income creation, the project before us is definitely sound. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 19 From the point of view of income distribution, a point touched upon. by my colleague and friend, Mr. Magnussen, I think the project also is quite sound. The papers before us . ~ "1low that the overwhelming beneficiaries from this project ,. will be land reform peasants, most of them farming or owning iess than 12 hectares, and quite a high proportion also would very small peasants owning or farming less than 5 hectares. $c from the point of view of income distribution, the project · is equally sound. From the viewpoint of employment opportunities, feinploymant impact, the project before us is supposed to provid -" new employment opportunity for more than 4,000 familiies, ihat is about 24,000 persons will benefit from this project on employment grounds. Finally, from the viewpoint of balance of payments, the project is also eminently qualified for Bank financing. Th papers before us show that the project, the agricultural project by itself, will improve the balance of payments by some $46 million whether in increased exports or reduced impor ,That these increased exports or reduced imports would be of the category of foodstuffs in a period of emerging food ·shortages, I think is an added argument. Thus, from the viewpoint of income creation, income HOOVER REPORTING CO, • • 320 Massachusetts Aven111,,tt.£. Washington, D.C. 20002 ·--, ~•r CCCC STRICTLY CONFIDENTIAL 20 distribution, employment impact, balance of payments, I do not -_..e that one can oppose on these grounds the project before ua. The same can be said with respect to the other proje t a-lso before us. So, nevertheless, I am aware that some member of this Board do not see their way to lending their support ·to these projects. I can discern three types of arguments 1JSed to support the position of those who are opposing the P,roject to Chile. Allow me, Mr. Chairman, to go into these . arguments one by one. p,.: The first argument used against the project could be described as the purely political argument. Some people ar toncerned about certain policies of the Chilean Government. '; Some are genuinely concerned about human rights policies and the status of human rights under the present Government. I would say that I am just as concerned as any of my colleagues about hwnan rights. However, I do not think tha this is a relevant argument even though it might be valid, I ·don't know. But this is not a relevant argument in the contex of this institution. First, this is not the forwn to bring up political arguments for or against any project. We are neither qualifie j as members of this Board, nor equipped to deal and to pass HOOVER REPORTING CO$ 320 Massachusetts Avenut,11.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 21 judgment on these arguments. Moreover, if we open up the door of political arguments, we will be opening up a Pandora's box of problems for this Board. Today it is Chile. Tomorrow it could be another country. And there is no end to our problems if we open up this door. Finally, with respect still to the purely political argwnent, I do not see who we are penalizing by opposing this tYeP\ of project. Are we penalizing the Chilean Government which is not liked by some members of the Board or some Governments? I don't think so. I think we would be penalizing the poor peasants who are going to benefit from these projects. I think we will be penalizing the Chilean people. And, above all, we would be penalizing development finance as such. I think the experience since the second world war shows very clearly how dangerous it is to use aid as a politica weapon. Many people around this table know that this is not the way to express political approval or disapproval. In fact, we would be defeating our very purpose if we use Bank financing for that purpose. For these considerations, I am unable to accept the purely political argument. The other type of argument which is used against the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 22 project is what could be described as the political economic argument. Political economic argument does not base itself on the project per se, but on the general conditions of the country, and it is maintained that Chile is not creditworthy. I beg to differ with this point of view. I am aware that the Chilean Goverrunent is experiencing considerable economic difficulties. This is undeniable. But at the same time, to judge the creditworthiness of any country is not something which should be taken in the abstract. It should be considered in the context of the specific economic and international conditions set down in the country in question. And in our case, one would not be quite fair if one forgets that the Chilean Government has been faced by adverse conditio s beyond its own control. A reference may be made to the collapse of copper prices in a country which is so heavily dependent on the price of copper . and the implication or the consequence of this collapse with respect to the terms of trade of the country. One would mention also, as was mentioned by the g~ntleman from the staff, the adverse international factors which have beset the economy of Chile as it has beset the economy of many other countries. For this reason, I do not share the view of my colleagues who cast doubt on the HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ~Al\l'I\ r'.lt"' t:.C.Ct:. STRICTLY CONFIDENTIAL 3 2. cseditworthiness of the country. The third type of argument, and to my mind the most . ._.rious type of argument, which is implicit, sometimes explici, ·lid- those who are opposing the project can be described as ~e political managerial argument. It is pointed by some that during the Allende regime, the Bank did not come up with any projects and now under the present regime projects are forth- coming. By implication they think, they believe, that the id:>sence of projects under Allende was a political position ~ken by the management of our institution. This type of argument I cannot dismiss lightly because my own country, Egypt, has once been a victim of a . certain attitude which led to the absence of any project ·financing in Egypt for a period extending from 1958 up to 1968 . However, one would be again unfair if one does not take into account the viewpoint of the management in this respect. ;fhey argue that the absence of projects under Allende and the •bsence of projects in the case of many other countries are aue to ec9nomic considerations, are due to questions related ~n their judgment as to the creditworthiness of the country at that time that there were no projects. They may be right. The management may have a reason. They might have based themselves on economic considerations, HOOVER REPORTING CO.it~· 320 Massachusetts Aven"'-kE. Washington, D.C. 20002 · - ....... .... ,. l"rr~ STRICTLY CONFIDENTIAL 24 on the questions of creditworthiness. I am not in a position really to judge the intrinsic validity of the position taken by the management in the days of Allende, but to the outsider, to the outside observer, in any case, the image that projected itself to the outside observer is one of a political position taken by our institution. This is a problem and we would be deceiving ourselves if we blind ourselves to this consideratio. / The problem there, to my mind, stems from a certain lack of symmetry with i:espect to the power of this Board. While this Board has a review and examination and decision pow r with respect to the positive decisions of the management. By positive decisions, the decisions which lead to bringing up actual projects before the Board. While it has a power of control over the positive decisions of the management, this Board has no control over the negative decisions of the management. By the negative decision of the management, that is the failure of the management to bring before this Board certain projects in a certain country for a certain period of • time. And this is a problem, which we have to face. That is, in what way can we bring this Board into the picture with respect to the negative decisions of the management? This is a very sensitive question and a sensitive area and an area in which there are many conflicting HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ---· ... ,. ,.,.,.r STRICTLY CONFIDENTIAL 25 considerations, because, on the one hand, the management has to have freedom of action. This is a sine qua non of good management. The management also ~as to have a certain confide - tiality with respect to elements on which a negative decision is based. This is also essential from the managerial point of view. On the other hand, the responsibility that the manag - ment is taking upon itself is perhaps very big, and we should find a way in which the responsibility should be shared betwee the management and the Board by bringing in this Board at one stage with respect to negative decisions. How? I have no answer to this. Perhaps some people who are more experienced, who understand better than myself the nature of the work of the Bank, whether on the management side or on the Executive Board side, perhaps they can advise us how can we bring this Board into the picture with respect to negative decisions of the management? Many things come to the mind, but these are only just thinking aloud, just sharing my thoughts. To what extent, for example, the country programming papers which are not available to this Board and on which negative decision as well as positive decisions are based, to what extent these papers could be made available to the Board without jeopardizi < HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D .C . 20002 4_.... . ._, ... ,. l"t!C:C. STRICTLY CONFIDENTIAL 26 the confidentiality which I think is very important. Perhaps ? a modified version, perhaps a longer, so to speak, version of the CPP could be co~templated. Perhaps also another way which I mentioned on one occasion, the principle of coupling should be explored, the principle of coupling in the sense tha one would bring before this Board a project for a country which is disliked by the left, we should at the same time as much as possible or as soon as possible bring another project in a country which is disliked by the right. Perhaps, I don't know, these are just thinking aloud. I know that this is not an easy problem. In fact, it is a __ v~ry difficult problem, but one thing is certain, Mr. Chairman, the answer to this problem, which to my mind is a real one, the answer to this problem is not to reject and not to oppose the project which are presented to the Board today. For this reason I am supporting the project. Thank you. MR. McNAMARA: Thank you, Mr. El-Naggar. One word on the neg'a tive power of the Board, or the power of the Board to deal with negative management decisions. I think the Board has that power and must continue to have it, and specifically with respect to the Chile situation, had it and exercised it, because the cessation of HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 27 lending to Chile didn't cover only a short period of time; , it covered, as I recall it, something on the order of three years. And there were. discussions within the Board on the issue of lending to Chile during that time and, of course, any · .B oard member at any time can raise an issue with respect to • negative or positive decision of management. And it •pplies not just to Chile, but to other situations as well. lmd,if you wish to call it,the negative action of management with respect to lending during that period was discussed with the Board on a number of occasions. As a matter of fact, I made public statements on the situation, copies of which, of course, were presented to the Board on at least two occasions during that three-year or period. This matter was discussed before the Ec,tsoc, the Economic and Social Council of the United Nations, and I • responded to questions in the Ecfsoc and copies were provided 1 to the Board, and for the information of those of you who were not members of the Board at that time, it is a fact that at the time of President Allende's death there lay before the Board, presented by the management, a recommendation for lending to Chile. Next I will call on Mr. Green. MR. GREEN : Mr. Chai rrnan, if we are to take the Bank' f HOOVER REPORTING CO ..... - 320 Massachusetts AvenuetM'E. Washington, D.C. 20002 1?07\ r.41..fi666 STRICTLY CONFIDENTIAL 28 Articles at face value, then the Board is required to decide the issue on economic and financial merits, which reall throws the discussion into, as far as I am concerned, two basic considerations. The first one, is the project viable end Tape 1 and in the interests of the economic development of Chile? end er HOOVER REPORTING CO~ INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 t'>n?\ 1;.u;.i;,;i;i; h STRICTLY CONFIDENTIAL 29 DKW/ 1 And secondly,- seeing that Chile will be paying this loan off after three and a half years of grace from year four to year seventeen, we've got to think of the longer term credit worthiness of Chile as a recipient of nank loans. When the copper loan earlier this year came to the vote, I indicated that I would vote for it provided that I felt assured of the validity of the management's view that Chile was credit worthy. And on the basis of replies then given, on balance, I felt that I should vote for the project. But at the time I did feel there was some aspect of the responses which left something to be desired. And obviously this worries the Board as a whole as indicated by the vote at that stage. That basically remains my position. I'm prepared to vote for this loan and the subsequent Chile loan provided I'm assured that the credit worthy position is satisfactory. On the project itself, it looks a sensible, viable project which benefits a large pwnber of Chile's inhabitants. Although there are one or two things in the project which I think perhaps call for notice as we go past it, because there hasn't been much discussion of the project yet. I'm a little bemused, for example, in looking at th8 cost of the vineyards to find that of $16 million that $7 HOOVERREPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ••. -.. r .1 ,. t:.~C C STRICTLY CONFIDENTIAL 30 2 Jllillion are for foreign exchange. I find it a bit hard to ,anderstand why it should have such a tremendous foreign .-,cchange component. This goes for the rest of the agri- c ultural work. Perhaps that calls for some comment. But by and large, the project looks a sensible project, well designed for the -- in the interests of Chile. And for a n outlay of $25 million they're going to receive $46 million Ln foreign exchange saved or eamed, according to the -t>rojections. Now on the question of credit worthiness -- and we've looked at this carefully. My headquarters have looked at this, particularly in t>ur ·Par\ One countries. One of them feels on the basis of the papers already that they can go along with an affirmative • . My other Part One countries · have raised a few questions which I'd like to hear some comment on before affirming my vote. The debt service ratio is still very high at 35 and 1/2 per cent even after rescheduling, and even with the projection for copper prices, which I'll speak about a bit later which look fairly favorable, the -- and if this course would have sane effect on real GDP growth -- the projected ratios still exceed 20 per cent in 1980. Now I know we have a lot .. of cases where we have even higher percentages, but they're HOOVER REPORTING CO • ••. 320 Massachusetts Avenue, It.£. Washington, D.C. 20002 I'll(\")\ ~AC CC:C:~ STRICTLY CONFIDENTIAL 31 3 mostly in countries with a much better developed manufacturing sector. And in this country, where the reliance is much more on the raw material -- the volatile raw material, copper -- and on agricultural, and a little later on forestry, is this -- are we happy with this ~rcentage? And perhaps some conunent could be made on that. I've read carefully Annex IV which brings up to aate the economic state of Chile. vAnd the percentages are set out in paragraph\~ 18. These rates getting up into the mid 30's are very, very high indeed. And we'd like to be sure that the ratios projected are not going to·. be a const~a1rrin~-.. factor · on the credit worthiness of this country. The inflation rate is still extremely high, despite the depressed economy·~ and very high unemployment. The third point: the level of domestic savings. I widerstand that the projections are -- the figures for 1975 were for domestic savings of only 3 per cent of gross national product. And if this is a correct figure ~it suggests to me that domestic resource mobilization is inadequate. And perhaps some comment on this one also is called for before we vote on this project. Finally, the projections for copper -- the prices did rise very rapidly in the first half ' of 1976 but they HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 32 4 cpickly peaked thei;eafter. And the Bank copper price «-5umptions were based on work done in the Bank in January *8d May when the prices were about to peak. And the question hether those assumptions were optimistic • ally i9 · 1 - oartainly optimistic or rather optimistic. Maybe the second part of my question, it's too early to give an answer t•. But I'll pose the question anyway. i. lot of claims are being made for glass fiber as a medium f"or communications -- electric transmissions and impulse transmission. Is it too early to know whether this has any • ignificant effects for the future of copper in communications f enerally or not and in volume sales? Those are the questions that I would like some answers t o, Mr. Chairman. As I say, my inclination is to vote for t he project. It looks to be a sensible project. There ~ppear to be some questions on credit worthiness. And in answering those, perhaps some comment could be made, seeing we' re talking about a loan. which will be repaid over a longish period, about the outlook for the rollover of loans by commercial banks. This appears to be a very important area in looking at Chile's credit worthiness whether those banks will indeed rollover their loans in the mid-term period of the ·loan we are now considering. HOOVE RR E PORTING C O. NC. 320 Massachusetts Avenua,'41:t Washington, O.C. 20002 .........,..~ r•r l:CCC 33 STRICTLY CONFIDENTIAL 5 Thank you. MR. McNAMARA: Then, four particular- points you are interested in, Mr. Green: the debt service; the domestic savings rate; the copper prices and associated substitute effect; and the outlook for rollovers. For, Mr. Levy, then, . debt service. Will it be a constraint? Do we have confidence in the ratios that Mr. Gree referred to? MR. LEVY: Allow me to make one correction to what Mr. Green said. There was no debt rescheduling in 1976. So the high ratio there reflects the full debt service payments due in '76. With regard to the projections, I should clarify that the were made assuming that Chile would accomplish a 7 per cent growth rate. Now what I was really demonstrating or attempt- ing to demonstrate with those projections is that they could achieve a 7 per cent growth rate consistP.nt with full debt service and the gradual reduction -r~ ""· you see there iri the debt service ratio. They could well choose to allocate a part of the improving terms of trade which we project for them to reduction of the debt. Those ratios could go down faster. It could at the price of a slightly reduced growth rate. ' The -- with regard to the savings rate, the figure for HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 6 34 1,1s has to be vi~wed in the context of the recession that (llile s•ffered in 1975, with national incane per capita declining 20 per cent or more. The savings were deeply -depressed. The normal savings rate for Chile through the -l960's up to 1970 was on the order of 14 per cent. It . ell across the early 70's as inflation accei/.rated and ~eached, of course, this very low level in 1975. We . '11ticipate that it will rise back toward that 14 per cent ievel by about 1980, '81. MR. McNAMARA: And next, copper prices: would our estimates today be different than they were at the time these were prepared? Has the potential impact of substitutes, glass fiber, aluminum, others, been considered? Maybe you wish to call on one of your associates? MR. LEVY: Yes, I'd like to call on Mrs. H~ghes to answer that question. MR. McNAMARA: Mrs. Hughes,would you comment on that? MRS. HUGHES: Mr. Chairman, members of the Board: It is, of course, difficult to forecast prices, and particularly short-run prices which are very volatile and responsive to feelings and markets and so on. ( . .. ~ However, in the ..4eonomic -!alysis and Jrojections ,,de- HOOVER REPORTING CO • •,. 320 Massachusetts Ave nu~. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 35 7 ~ rtm.entf we do keep long-term price projections as well as ' the short-term projections under constant ~eview~ We have fl<)ted that it seems that copper prices have currently bottomed I· o ut. Yesterday's quotation, at 59.4 cents a polm.d was about , he November average for 58 cents a pound. And this i~ in \ eeping not only with our own forecasts for 1977, but also • ith those of the IMF and European economic forecasting l nstitutes, which expect the return to somewhere between 75, 85 cents a pound for 1977. In the short run, we anticipate some recovery in demand with the continued growth of the OECD, although that growth -· is not as high as was expected six months ago in the dis- >,cussion to which Mr. Green referred. Also, in early 1977 we expect the process of renegotiatio in the American industry, which generally halts production for awhile, or reduces it, and which is expected to give a short term boost. And the volatility of the short rWl copper prices is illustrated by the way they dipped in respona to the slowing down in the OECD economies in the current year, and the way that they appeared to have recovered. However, I think that the main concern of the Board on this occasion is with the long-term trends. And there we have had no real occasion, after consulting with others in HOOVER REPORTING CO, a · 320 Massachusetts Avenuffift.£. · Washington, D.C. 20002 STRICTLY 8 n CONFIDENTIAL 36 t,\e industry, to revise the long-term forecast. We expect ~ at copper will rise -- copper prices will rise at a slightly . faster rate than inflation for the following reason$. First of all, as there is a recovery in demand, the ,D!latively high cost producers such as the United States -tnd some other mines including sane of the Australian mines, .. ·• ill come back into production, and their costs are well above the current costs. There has been a lack of investment currently. And t nvestment is needed not only for an increasing production, b ut even for the maintenance of production. And as is \.Tell known, the cost of investment is rising relatively rapidly. There are ri6 signs of major mines coming ip in the next ~~3 ~ ·five years beyond the Iranian mine S1lasba1!!1h !Ml} (?1', which ~will be a major producer. So that we expect a steady · development on the supply side, which will require a great deal of investment which is rising in cost. Now, on the demand side, glass fibers will have some effect on demand for copper, but it doesn't appear that this will be very strong in the next five years, and possibly even longer, because of the ·relative cost of production . - Now, in addi tion there are some signs that there is HOOVER REPORTING CO. .. 320 Massachusetts Avenuei.lf.f. Washington, D.C; 20002 ,.,n?, i..u;.i;i;,;,; STRICTLY CONFIDENTIAL 37 9 l 90rne substitution -out of copper. Apparently, in Europe • · jhrticularly, it has been -- it is increasingly thought that copper substitutes (plastic and even alwninurn) cause r -•ire hazards. ~ And for that reason there is a very strong . • turn to copper. And for that reason we -- our forecasting, i· . : " ' ' re maintaining our forecast over relatively -- of a ' '.l· ~lightly higher rise in copper prices than in inflation. Finally, to conclude, I'd like to point out that in p resenting this project, it has been very prudently assumed t hat -- it's on Table 5 of the -- actually, of the power p roject, that even if the income from copper fell to a level 15 per cent below the forecast which we made, this •ould not effect the growth of the Chilean economy sub- stantially. MR. McNAMARA: Thank you very much, Mrs. Hughes. Now, Mr. Levy, one last question relating to credit worthiness. The outlook for rollovers of commercial bank loans. MR. LEVY: The inflow of commercial bank credits to Chile, particularly to the private sector, bas grown very rapidly this year, faster than we . had anticipated. And all I can say in this regard is that the bankers I have talked ~ to in the past several months are quite bullish on Chile. They are quite impressed with the effort that the dlilean HOOVER REPORTING C O . IS. 320 Massachusetts A venue:._lt. Washington, D.C. 20002 ...- .. .,. .,.,.~Cl! STRICTLY 10 CONFIDENTIAL 38 1a>vernment has made over the past year to maintain debt i '. -~rvice, and they are confidant of its determination to + ntinue doing so. MR. McNAMARA: Well, Mr. Green. MR. GREEN: I'm pl"eu.ed to hear those remarks, ~- ·.,t r. Chairman. There was one other point I raised, and that ~ as foreign exchange components in the agriculture l MR. McNAMARA: Oh, I beg your pcdon , yes. Why imch a large foreign exchange ccnponent, Mr. Levy? And :,f1r. Green ntentit>ned particularly vineyards, but he commented it extended beyond that. MR. LEVY: Yes, I'd like to call on Mr. Berg to · answer that question. MR. McNAMARA: Surely. MR. BERG: The foreign exchange component for the vineyards has been estimated at 44%. And this is due to some highly specialized equipment chemicals and fertilizers. You can find that in the Annexes that for establishing new vineyards you need specialized imported fertilizer, and you need a lot of chemicals. Furthermore, the vineyards require a lot of trellissing, which means specialized wire which is imported. Further, .. small tractors able to work in the vineyards -- all imported. HOOVERREPORTING CO ••• 320 Massachusetts Avenue~JU. Washington, O.C. 20002 · ,.,M, ~AC CCl:I: STRICTLY 11 CONFIDENTIAL 39 So all in all, we estimated the foreign exchange component in summary as 44 per cent. MR. McNAMARA: Thank you, sir. Mr. Razafindrabe: MR. RAZAFINDRABE: May I speak in French' sir? Mr. Chairman~; the · two proposed loans before us meet, in our opinion, the basic criteria applied by the world Bank when granting a loan. In this connection, I wish to associate myself to the observations of Mr.Rl.:=-Naggar regarding the viability and also the positive aspects of the agricultural project and of the energy project~ regarding income production, distri- bution of income, employment creation, and, above all, the major beneficiaries of the project, namely, the peasants. So I wish to support those projects from the basis of this basic criteria which is economic in nature. In so doing, I wish to refer to the constant positions taken by the Board, and that the Board should always take, namely, to examine the project according to economic criteria and also, and above all, not to debate political subjects which do not fall incidentally within the competence of the World Bank. . There are international institutions which are proper for such debates. HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 "'"'" 1:AI: 1:l:l:l: 40 STRICTLY CONFIDENTIAL 12 Agreement for the financing of both projeece should be considered only in accordance with the economic criteria, and could not in any way be interpreted as a political gesture. In any case, I do believe that the countries and the poor segments of the populations of these countries, which are, in the last analyses, the major beneficiaries of the projects we are financing. They should not be penalized because of the existence of a political system. On the contrary, they should be helped so they can free themselves as quickly as possible from the handicap of underdevelopment and from absolute or relative poverty. Because political systems change but the countries remain. And the peoples of these countries are trying to struggle from one generation to another, either for their survival or for the improvement of their standard of living. It is along these lines, Mr. Chairman, that we will vote for both projects before us. Thank you. MR. McNAMARA: Thank you, sir. Mr. Bilget. MR. BILGET: Thank _you, Mr. Chainnan. I don't want to prolong the discussion, and for that HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C, 20002 1 "'""" CAC cc.cc STRICTLY CONFIDENTIAL 41 13 reason I'm not going to offer my personal remarks on any implications of today's discussion about the two Chilean projects. Others have already done that on both sides of the issue, and quite ably, I must say. Assuming that at the end of the meeting, only the end result of the positions of our constitutenctes will be offered, I would like to •briefly explain, as requested, the individual position of my constituents. After close consultation with my constituency regarding these two projects for Chile, I have been advised by my Belgi~and Luxemburg authorities that they do not think that certain conditions in this country have changed fundamentally since the beginning of this year. Consequent- ly, they wish .to maintain their negative stand with regard to Bank lending to Chile, a position which was already explained during our discussions of the copper project early February. My Austrian authorities have asked me to abstain when working on this matter. On the other hand, my Turkish authorities can approve the two projects on the basis of their individual technical merit. • Having said this, I wish to be recorded as stating on HOOVERREPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 .tft,IV'I," c•~ CC. C.C. • STRICTLY 14 CONFIDENTIAL 42 behalf of my Turkish authorities that their vote on any project in this Board does not in any way indicate that they approve or disapprove simultaneously the political system of or the political elements in the related borrowing country. Consequently, taking into account the position of all my constituencies, I wish to be recorded as abstaining on both subjects. Thank you , Mr. Chainnan. MR. McNAMARA: Thank you, sir. Are there othe~ho wish to speak to this? Mr. Gyasi-Twum. MR. GYASI-TWUM: Thank you, Mr. Chairman. This chair has, on two previous occasions, intervened to express reservations on ti\e ffleRey ,raRt decision to propose projects for Chile. These reservations have been made on the grounds that some of our constituents have fp~ ~ expressed doubts as to whether or not •cme5 92a11t have adhered strictly to the Bank's bylaws which require that only economic considerations should apply in bringing projects for Board approval. That is the third argu~ent identified by Mr. El-Naggar in his lucid intervention. HOOVERREPORTING CO~INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 .-......... ,. • ,.. ~~cc. ~ I STRICTLY 15 CONFIDENTIAL 43 On the last occasion this chair found it necessary on these grounds to refrain from participating in the vote. on the present occasion, Mr. Chairman, we will cast an affirmative vote since the majority of our constituents would not like to substitute a judgement for that of the management ori this occasion. We would, however, wish to ask management to exercise extreme caution in applying the rules so that countries will not be in any doubt that these are applied equitably to all countries. At the same time, Mr. Chairman, I would like to take this opportunity to record that two of our constituents -- Ali~-,,,'~ YFn,,..e ,.., . - that's l'L1•ica and South Via 111et, and possibly Libya, from 1 whom we have not received instructions -- still have strong reservations on the timing of the present project, and would like this to be recorded as part of the proceedings of this meeting. Thank you, Mr. Chairman. MR. McNAMARA: Thank you. Mr. Popovic. MR. POPOVIC: . Thank you, sir. As on previous occasions, this chair attaches importance to stating that in conformity with the acts of agreement HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY 16 CONFIDENTIAL 44 of this institution, financial, economic and developmental consideration relative to the two projects before us should be decisive in guiding in our deliberations. on the general credit worthiness of Chile as a country, we have had long discussions in this Board, the ~utc~e of which has mostly been that the Board aceepted management's judgement, although sometimes with the realization that there existed much scope for different viewpoints. If the assumptions of staff and management regarding the copper price are right, management should again be given the benefit of the doubt with regard to the judgement on Chile's credit worthiness. The strictly economic side ~f both projects before us seems expected. Staff has applied the usual criteria. In the documents before us, a vivid and rather candid account is given of the economic, financial and social development in Chile during the last couple of years. Documents make quite clear that social costs of the rather harsh adjustment policies has been and still are enormous. The documents also show with clarity that the social costs have been borne mainly by those groups in the country which are 7--it'st able to bear such c?sts, or in other words, least able to suffer more. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL 45 17 If a vote would be taken, Mr. Chairman, on these projects, this chair would ab~tain. The last thing, Mr. Chairman, I would like to state for yourinformation and for the record that the Netherlands stopped its bilateral development assistance to Chile be- cause of the political situation in the country and the continued violation of human rights. Thank you very much. MR. McNAMARA: Thank you, Mr. Popovic. Mr. Reynolds. MR. REYNOLDS: Mr. Chairman, my authorities with my participation and assistance have examined these two proposals very carefully. In our judgement, both of them are sound. We think they meet in all respects the Bank's criteria, and that they should therefore promote economic development as well as result in substantial benefits in increased employment, in high earnings for large numbers of Chile's poorest citizens. We can accept, too, the judgement expressed in the documents and reiterated in the presentation this morning concerning recent 1 .,. economic developments, and the basic ' question of credit worthiness, and the long-term economic HOOVER REPORTING CO~INC. 320 M assachusetts A venue, N.E. W ashington, O:C. 20002 STRICTLY CONFIDENTIAL 46 18 prospects of Chile. For all of these reasons, we find no economic grounds for objecting to these loans. And given the long-standing tradition of the World Bank, based on, we feel, both the letter and the spirit of its charter, we believe as others have expressed here this morning, that economic grounds should be controlling. I wouldn't, though, want my position here to be in any way interpreted as exhibiting a lack of concern for human rights, which a number of other speakers have in one way or another already touched on. I represent here a government and a people for whom nothing is more sacred than human rights. And the fact , is, the United States is concerned about the human rights situation in Chile. That concern has been expressed, as I'm sure all of you know, in Congress. It's shared hy the Executive Branch. And I myself feel it most profoundly. We welcome the recent release of political prisoners. We hope that the government of Chile will continue to take steps to improve the nation's human rights situation. It seems to me that one can legitimately hope and expect, in keeping with the concepts underlyi~g the Brefn Woods institutions that these projects will effectively help to HOOVER REPORTING CO~ INC. 320 Massachusetts Avenue, N.E. Washington, O:C. 20002 ·-••~ ra,. ,.,.Cl! STRICTLY CONFIDENTIAL 47 19 encourage and advance that improvement, and more effectively than would a decision to withhold the loans on grounds which, in my view, would clearly be inconsistent with the Bank's charter, and which, as others have expressed here this morning very ably, would only penalize the poorest and neediest citizens of Chile who are least able to bear that burden, and least deserving of bearing it. Thank you. MR. McNAMARA: Thank you, sir. Mr. Matsunaga. MR. MATSUNAGA: Thank you, Mr. Chairman. First of all, I would like to express my words of thanks to staff for their difficult job and effort for ?? making a very good report, a very comprehensive report on Chile's economy. According to staffappllai.'981.., it is very encouraging to know that in recent months, although the rate of inflation is still high. But there are signs of improvement in the general economic situation, as well as in its financial institutions. And we're taking this background into mind, and also ~~?J~ k basing on the standards laid down in the ett 1ua ,..dgreement - I of the Bank. My chair, it has already supported the HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C . 20002 l?n?\ "41>-6666 48 STRICTLY CONFIDENTIAL 20 proposed two loans to Chile. We feel they shall contribute to the further development of Chilean economy, and reduce the unemployment rate. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, sir. Mr. Drake. MR. DRAKE: Thank you, Mr. Chairman. The }rticles of 1reement of the World Bank, as well as the custom and practice of this Board, require us to judge all projects solely on economic, financial and developmental criteria, and on technical soundness. On these basesr I have no option but to support these two project!!. The President's reports elucidate why Chile is credit- worthy for lend.iftg. The projects show goc!)d economic and financial rates of return. In human terms, the agricultural project is particularly attractive, because it will improve the living conditions of some 50,000 small farmers and rural poor. ~est there be any misunderstanding of my position, may I say that allot' the countries I represent have consisten~ and vigorottsly opposed the violation of human rights in HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 1?0?) 546-6666 h STRICTLY CONFIDENTIAL 49 21 Chile and elsewhere. The countries of this constituency believe, however, that human rights issues should be pursued in the United Nations and not in the World Bank, which should concern itself exclusively with economic development. Mr. Chairman, in addition to the foregoing remarks, made in respect of all seven countries in my constituency, I have just received instructions for the Governor for Ireland to express his country's continuing concern about the human rights situation in Chile. He has also asked me to state on behalf of Ireland, and I quote: "We accept that decisions in the IMF and the :f il(BRD should be apolitical. However, we are concerned that this ~rinciple may not have been followed during the Allende regime, during which no loans for Chile were approved." Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Drake. Are there others who wish to speak to this? Mr. Thahane. And then Ryrie. MR. THAHANE: Mr. Chairman, like some of my colleagues before, we feel ,zery strongly that, on the economic criteria; as required by the tticles, should be applied in looking at any projects that. come before the HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 (? n?, 'i4f;-hnnli STRICTLY 22 CONFIDENTIAL 50 Board. In that context, we judge the projects that have been submitted to us to be good ones, and we are ready to lend our support 1:112, them. , r- , With respect to any other argUments, we would merely say we feel that the Bank should, as much as possible, restrict itself to those arguments that can, to a large extent, be quantified. And we consider the management's statement on the credit worthiness to be sufficient. And we will support management's recanmendation to lend to Chile. / .... Let me note, however, that we attach importance to the point raised by Mr. El-Naggar about a way to be found to deal with or to inform the Board about those decisions which do not -- or about those negative decisions which management may have made. I'm aware that at the end of each financial year management produces a report on the countries in which there have not been any operations for that particular year. Bue~'m not sure whether this is adequate. And I have an open mind to this question. And I would like to explore it further. Thank you. HOOVERREPORTING co. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 l?O?\ r..46-6666 l 1 I • STRICTLY CONFIDENTIAL 51 23 MR. McNAMARA: Thank you, sir. Mr. Ryrie. MR. ·RYRIE: Just a few words to make my position clear, Mr. Chairman. The policies of the Chilean government as they affect human rights led my government to conclude earlier this year that they could not associate themselves with a proposal for a lending to Chile. But for the provisions of the Articles, of which we are very much aware, they would have felt it rights to oppose those proposals. But in view of those provisions, they instructed me instead to stand aside and abstain. The position hasn't fun~amentally altered since then. And that will be my position in the vote which we will be taking. Thank you. MR. McNAMARA: Thank you, Mr. Ryrie. Mr. Janssen. MR. JANSSEN: Mr. Chairman, my government has as its policy that the Articles of Agreement provide the lending guidelines for the Bank. Therefore, we are basing our attitude toward these projects on considerations about the country's credit worthiness, and the contributions which these ,projects will make to the social and economic HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 uuv,, CA.C t:.t:.t:t:. STRICTLY CONFIDENTIAL 52 24 development of the borrowing country. That means in the case of Chile, with regard to its credit worthiness, of course, we continue to have some doubts about Chile,s credit worthiness. These doubts in themselves are not sufficdent not to proceed with lending to Chile at all, and particularly if one compares Chile's credit worthiness with some other countries to which the Bank is lending. Moreover, it seems to us that since our last discussion about the economic situation in Chile, the principal economic indicators have improved. With respect to the projects before us, we feel that these projects will benefit the population of Chile directly or indirectly. We have a clear preference for the agri- cultural project. To me, it seems to be a very sound one that will contribute to the much-needed increase in agricultural productions. Your report stMtes that the government's effort• to restore domestic.-·agrieultural output to 1970 levels did succeed. But there is still much left to be done if the long period of poor performance dating back to the early 60's is to come to an end. The project has social components which are particularly welcome. how the project's funds will bene ~ hi le 's HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D .C. 20002 1?112) 546-6666 STRICTLY CONFIDENTIAL 53 25 lowest 30 per cent income group. Moreover, giving Chile's economic structure, it seems, an increase in agricultural production should not only benefit domestic consumption but also the balance of payments. When lending to Chile, in our mind the Bank should give more emphasis to . projects of this kind which, besides economic benefits, have a direct overall social impact. There is no such direct social component in the power project, and only indirect benefits progress out from the project for the Chilean population. However, this power project is as good as any the Bank has financed in developing countries. Let me finally add some personal remarks. My support for these projects does not mean that I endorse the present regime, or any of its actions, in particular, the violation of human rights. On the contrary, I have as you have, Mr. Chairman, and many colleagues in this room, strong personal and emotional feelings about the situation in Chile. Yet I believe tt to be of paramount importance for the Bank that we refrain from political considerations when we decide on loans to a member count ry which, by the way, is also a shareholder of the Bank. HOOVER REPORTING CO, INC. 320 Massachusetts Avenue, N.E. . Washington, D.C. 20002 1?0?\ 1,41,.1,1,66 1 STRICTLY 26 CONFIDENTIAL 54 A lending policy which does not have as its foremost criteriot\.-the productivity of investments and the credit worthiness of the recipient country, but other political and non-political interests, will soon ruin the Bank, and the Bank will become the subject of pressure groups and forces which are not responsible for the overall conduct content of the policy of the Bank. Once we allow political considerations such as whether countries are democracies or dictatorships~ with a right or left government, are eligible for loans, enter into our discussions, we might close the windows of the Bank. If these consideration.s enter into our decision-making, then we must pass judgement on the political confonaity or aeceP,tability of any borrowing member. I feel strongly our obligation,our responsibility,to observe and to adhere to the Articles of Agreement, , rather than making the Bank a weapon in the war/ ~f ideologies. I, It is interesting to note that my colleagues from the developing countries share my concern. They know how important it is for them to safeguard the Bank from attempts to make loans on the basis of political motivation. We walk the very narrow pass between having to behave as a Bank on the one side, and promoting economic and social HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. (I Washington, O.C. 20002 1?117\ "4(;.6666 1 STRICTLY CONFIDENTIAL 55 27 development on the other, a task almost impossible to accomplish. For tour banking functions , we need credit ~ , the confidence of the capital markets, and a conservative approach. For our development task, we ·need courage, the will to experiment, and the liberal approach. In its member countries, the Bank depends on the support of liberals and conservatives alike. The Articles of Agreement are the tool that helps us to perform our functions. Our main concern has been to use this tool wisely and keep t~e Bank intact as an institution to serve the developing countries. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, sir. Are there others who wish to speak to this? I f not, I'll call on the Secretary to call for a vote on the first proposal, a proposed $25 million equivalent loan to Chile for an agricultural project. Just the agricultural. THE SECRETARY : Just the agricultural . Mr. Reynolds •. MR. REYNOLDS : ~~ t9"v HOOVER REPORTING C0 1 INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 I I? n?' "4fi.f;fififi STRICTLY 28 CONFIDENTIAL 56 THE SECRETARY: Mr. Reynolds, in favor. Mr. Bilget. MR; 'BlLGE'.t: Abstain . THE '-ECRETARY: Mr. Bilget abstains. Mr. Drake. MR. DRAKE: In~~- THE SECRETARY: In favor. Mr. El-Naggar. MR. EL-NAGGAR: In favor. THE SECRETARY: Mr. El-Naggar, in favor. Mr. Franco. MR. FRANCO: Yes. THE SECRETARY: In favor. Mr. Green. MR. GREEN: Yes. THE SECRETARY: In favor. Mr. Gutierrez. MR. GUTIERREZ: Yes. THE SECRETARY: In favor. Mr. Matsunaga. MR. MATSUNAGA: In favor. THE SECRETARY: In favor. M;. Janssen. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 /?0?\ i;.l./;.h/,fi6 , . STRICTLY CONFIDENTIAL 57 29 MR. JANSSEN: Yes. THE SECRETARY: Iri favor. Mr. Gyasi-Twum. MR. GYASI-TWUM: For. THE SECRETARY: For, ~, thank you. Mr. Popovic. MR. POPOVIC: Abstain. THE SECRETARY: Abstain. Mr. Magnussen. MR. MAGNUSSEN: Against. THE SECRETARY: Against. Mr. Pesqueira. MR. PESQUIERA: For. THE SECRETARY: For. Mr. Razafindrabe. MR. RAZAFINDRABE: For. THE SECRETARY: For. Dr. Rota. MR. ROTA: Abstain. THE SECRETARY: Abstain. Mr. Ryrie. MR. RYRIE·: Abstain. THE SECRETARY: Abs-tain. HOOVERREPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 1?0?) <;4f;.J;666 58 STRICTLY 30 CONFIDENTIAL Mr. Islam. MR. ISLAM: For. THE SECRETARY: For. Mr. Thahane • MR. THAHANE: In favor. THE SECRETARY: In favor. Mr. Thavil. MR. THAVIL: Yes. THE SECRETARY: In favor. Mr. Wahl. MR. WAHL: Abstention. THE SECRETARY: .Abstains. MR. McNAMARA: And now we'll call for a vote on the proposed loan to Chile of $35 equivalent for a power project. THE SECRETARY: Mr. Reynolds. MR. REYNOLDS : For. THE SECRETARY: In favor. Mr. Bilget. MR. BILGET: Abstain. THE SECRETARY: Abstain. Mr. Drake. MR. DRAKE: In favor. HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, O.C. 20002 l?n?\ 'i4fi-6666 59 STRICTLY CONFIDENTIAL 31 THE SECRETARY: In favor. Mr. El-ftaggar. MR. EL-NAGGAR: - In favor. THE SECRETARY: In favor. Mr. Franco. MR. FRANCO: In favor. THE SECRETARY: In favor. Mr. Green. MR. GREEN: Yes. THE SECRETARY: In favor. Mr. Gutierrez. MR. GUTIERMZ: Yes. THE SECRETARY: In favor. Mr. Matsunaga. MR. MATSUNAGA: In favor. THE SECRETARY: In favor. Mr. Janssen. MR. JANSSEN: For. THE SECRETARY: In favor. Mr. Gyasi-Twum. MR. GYASI-TWUM: For. THE SECRETARY: In favor. Mr. Popovic. HOOVERREPORTING CO, INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 l'>M\Ul:J:1:1:1; STRICTLY CONFIDENTIAL 60 32 MR. POPOVIC: Abstention. THE SECRETARY: Abstain. Mr. Magnussen. MR. MAGNUSSEN: Against. THE SECRETARY: Against. Mr. Pesqueira. MR. PESQUEIRA: In favor. THE SECRETARY: In favor. Mr. Razafindrabe. MR. RAZAP'INDRABE: In favor. THE SECRETARY: In favor. Dr. Rota. OR. ROTA: Abstain. THE SECRETARY: Abstain. Mr. Ryrie. MR. RYRIE: Abstain. THE SECRETARY: Abstain. Mr. Islam. MR. ISLAM: For. THE SECRETARY: In favor. Mr • Thahane • · MR. THAHANE: For. THE SECRETARY: In favor. HOOVERREPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 l?O?\c;,\~J;f; 11 61 STRICTLY 33 CONFIDENTIAL Mr. Thavil. M~. THAVIL: In favor. THE SECRETARY: In favor. Mr. Wahl. MR. WAHL: Abstain . THE SECRETARY: Abstain. MR. McNAMARA: Each of the loans has been approved, HOOVER REPORTING CO. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 {?0?) r.46-6666